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CHAPTER VII

SUMMARY AND CONCLUSIONS

Electricity is considered to be the most convenient and versatile form

of energy. It is classified as a secondary source of energy because anyone of

the primary sources like coal, gas, petroleum, hydro-power, wind and solar

energies may be used to produce electricity. Due to its more adaptable

nature, it is a preferred source of energy at the consumer ends. However,

energy being a scarce and valuable resource, great emphasis is laid on its

optimal use. Per capita consumption of electricity is also considered as an

indicator of economic prosperity. Therefore, to study the Economics of

Electricity Supply is an important and critical issue for a student of

Economics.

Power sector reforms in India were initiated in early 1990s. Initially,

the reforms were taken at the electricity generation level. After the initiation

of liberalization process as a part of the New Economic Policy of 1991,

private as well as foreign direct investment was allowed in the power

generation business. Consequently, the Dabhol Power Project promoted by

the Enron Power Corporation with a generation capacity of 2184 MW

(Phases I&II) was permitted to be established and started its operation in the

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state of Maharashtra in 1999. However, the plant could not be proved as an

economically viable source of energy for the Maharashtra State Electricity

Board (MSEB). The operational and financial issues of the plant such a high

cost of electricity generation, foreign exchange risks etc. were highly

criticized at the national as well as international levels. Ultimately, the

MSEB stopped purchasing electricity from this plant. At that stage it was

realised that generation segment alone would be unable to attract adequate

investment unless distribution section reforms were also undertaken

simultaneously. Therefore, some of the states initiated the power

restructuring process at the state level. Orissa was the first state in the

country that implemented the power sector reforms in 1996 under the

supervision of World Bank. After Orissa, some other states such as Haryana,

Andhra Pradesh etc. adopted the power sector reforms at the state levels.

The reforms included unbundling, corporatisation and privatization of the

State Electricity Boards (SEBs). Moreover, various types of policy and

structural changes such as establishment of independent regulatory

authorities have been undertaken as a part of power sector reforms in the

country. The state of Punjab was one of the states which also adjusted power

sector reforms. This study critically examines the improvement, if any, in

the technical and financial performance of the power sector in Punjab after

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adoption of the reforms process. The main objectives of the study are as

follows:

A comparative analysis of the technical as well financial performance

has been undertaken between the pre-reforms and post reforms periods. The

operational performance of the restructured power supply industry in Punjab

has been compared with the selected power utilities of the country namely

Andhra Pradesh, Karnataka, Maharashtra and West Bengal. The study

targets to achieve the following objectives:

1. To compare the technical and financial performance of the Power

Sector in Punjab State in the Pre-reform and Post-reform periods

2. To evaluate the regulatory performance outcomes of restructuring

process in power sector in Punjab

3. To undertake a comparative analysis of the financial performance of

Power utility of Punjab with selected best performing SEBs/utilities

4. To examine the pricing policy in relation to the cost of supply adopted

in post-reforms process in Punjab

5. To make suggestions and recommendations to improve the financial

performance of power sector in the state

The Punjab State Electricity Board (PSEB) was constituted on

01.02.1959. It was incorporated as an integrated power supply utility under

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the provisions of the Electricity Supply Act 1948. In 1967, Punjab State

Electricity Board was re-organised to create a separate Haryana State

Electricity Board. In the development planning process, the growth of power

sector was given a high priority. Large shares of the state Five Years Plan

outlays were allocated to the development of power sector. The relative

shares of the expenditure on power in total plan expenditure in the State

were estimated between 25% to 30% during various Five Years Plans. Due

to sustained efforts made by the Government of Punjab, the power sector

exhibited a rapid growth in increasing the physical network. Consequently it

helped in increasing the rural electrification and raising per capita

consumption of electricity. Punjab was reported as one of the states in the

country achieving fast rate of rural electrification. The generating capacity

increased very significantly. Initially (in 1959, when PSEB incorporated),

the state had an installed capacity of 62 MW. The installed capacity of the

state increased to 4459 MW as on March 31, 2002. The current installed

generation capacity of the state is estimated to be 7035 MW As on June 30,

2011. Because of rapid increase in the installed capacity, the per capita

consumption of power increased from 43 KWH in 1950-51 to 1663 KWH in

2009-10. Within this period number of electricity consumers has also

increased substantially. The number of electricity consumers increased from

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9,55,234 in April 1971 to 75,49,219 in March 2011. In spite of impressive

physical performance, PSEB showed poor technical and financial

performance. Regarding operational performance, it suffered from the

problems of low Plant Load Factor (PLF) and high Transmission &

Distribution losses (T&D losses). The PLF of PSEB was reported to be 50%

as compared to the national average of 57% in FY 1992-93.

In the pre-reforms period, PSEB showed poor performance in the

revenue collection efficiency. The tariff was kept lower than the cost of

supplying power to the various categories of consumers. The average

revenue realised (from all consumer categories) as a percentage of average

cost was reported to be 51% for the year 1990-91 (Table 4.6). In such a

situation, the Board could not maintain its financial viability. It had to resort

to borrowing even to meet its current expenditure needs. The Board was

leading towards financial bankruptcy. It was in such a state of affairs that the

State Government started reforms to overcome the technical as well as

financial problems. The Government of Punjab (GoP) started reform process

in 1999. At the outset, Punjab State Electricity Regulatory Commission

(PSERC) was constituted to regulate the distribution, transmission and

generation functions at the state level. Later, the Electricity Act 2003 was

enacted by the central government. Hence, the functioning of power sector

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as well as PSERC are now governed by various provision of the Electricity

Act 2003. As per provisions of the Act, the regulator is required to strike a

balance between the interests of the consumers and the electricity

distribution company. Hence, the Commission is expected to act as an

autonomous and independent authority for making fair and just decisions.

The Commission has adopted Revenue Requirement methodology for

approving the tariff payable. Under this method the tariff is approved for

some specific period generally one financial year. Regulated company is

required to submit projections of Annual Revenue Requirement (ARR) each

year, three months before the commencement of the ensuing financial year i.

e. by 31st of December of the current financial year. The tariff making

process is expected to be completed within three months so that new tariff

order could be implemented with effect from the 1st of April, (the first day)

of the ensuring financial year. However, during most of the past years, the

PSERC was not able to issue the Order within stipulated date and time.

After undertaking reforms, some serious efforts were made on part of

the PSEB to improve the technical and financial performance. Improvement

in the capacity utilisation of thermal plants was one important area where the

PSEB showed a remarkable performance. Before the initiation of power

sector reforms, the performance of thermal plants owned by state of Punjab

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was not satisfactory. In 1980-81, the average PLF of Punjab’s Thermal

Power Stations was just 34.6. It showed some improvements in the PLF and

it increased to the level of 59% in 1985-86. However, it was not very

satisfactory. From 1996-97 onwards, the thermal plants of the state have

shown significant improvement in the rate of capacity utilization especially

of the new generating plants and it was reported to be one of the best

performing generation utilities in India. The PLF reported by PSEB

increased from 66% in 1990 to 88% in 2009-10. Due attention was provided

to the repair and maintenance work of the power plants. Consequently, the

PLF of PSEB remained much above the all India average during most of the

post reforms period. However, there were high variations in the PLF

reported by various power plants of PSEB. The performance of GNDTP

Bhatinda power station was not very much satisfactory in comparison to

other plants. The PLF reported by GNDTP Bhatinda was 71% in comparison

to 96% as reported by GHTP Lehra Mohabat in FY 2009-10. So, there is

scope for further improvement in the overall Plant Load Factor (PLF) if

proper renovation and modernization work is undertaken.

The auxiliary consumption of thermal power stations of Punjab was

much lower than all India average. In the FY 2008-09, the auxiliary

consumption of the power plants of PSEB was reported to be 6.18% while it

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was estimated to be 8.36% for the national average. However, it showed an

increasing trend in the auxiliary consumption. In the recent years, the

auxiliary consumption has increased significantly. The auxiliary

consumption in Punjab has increased from 4.49% in 1994-95 to 6.18% in

2008-09. The main reason for this is the old life of the power plants. Over

the time, the plants are becoming older, requiring high auxiliary

consumption of power. So, there is a need for taking proper maintenance of

power plants so that the auxiliary consumption is reduced further.

Like other states, high Transmission and Distribution losses (T&D

losses) were identified as one of the main reasons responsible for poor

performance of the Punjab State Electricity Board (PSEB). It was reported in

the range of 20% to 28% during the period of 1991-92 to 2008-09 where as

the maximum acceptable limit is about 15% as per norms and standards laid

down at the national as well as international levels. Though, some progress

was reported on part of PSEB in reducing the Transmission and Distribution

losses, however, there is further need to reduce the energy losses so that the

commercial losses of the Company are reduced to acceptable levels.

Another major problem regarding T&D losses was the accurate

estimation of the energy losses in agriculture sector where the supply was

not metered. Therefore, it was not possible to make a reliable estimate of the

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consumption made by the agricultural sector. At the same time, distribution

companies have a tendency to overestimate the agricultural consumption to

show better performance in terms of reduction in the transmission and

distribution losses. The Punjab State Electricity Regulatory Commission

(PSERC) has repeatedly questioned the estimates of the agricultural

consumption and the energy losses projected in the Annual Revenue

Requirements. It also used some alternative methodology to make an

accurate estimation of the energy consumption made by agriculture sector. It

was established that PSEB has been overstating the electricity consumption

of the agriculture sector so that it can understate the energy losses.

It was observed in the tariff orders passed by the PSERC that the

Commission has started questioning the estimates of agricultural

consumption made by PSEB (Tariff Order Passed by the PSERC dated

06.09.2002). It was observed that the actual losses were much higher than

the claims made by utilities. The PSERC has started lifting up the energy

losses to make a reliable estimate of energy losses. That is why in the post

1999-2000 periods, estimates are much higher than what were earlier

reported by the Board.

Recovery of electricity dues from consumers is also an important

determinant of the financial position of the concerned utility. In the pre-

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reforms period, under recovery of consumer dues was identified as one of

the major factors responsible for the poor financial health of the Punjab State

Electricity Board. This point was also highlighted in the report of Expert

Group on Power constituted by Government of Punjab in 2003.

It was observed that in the recent times the recovery of dues has

increased significantly. It has been reported to be about 100% during the

period from FY 2004-05 to 2009-10 except FY 2008-09. It is an indicator of

improving financial performance of the distribution company.

Aggregate Technical and Commercial losses (AT&C) losses was used

as a composite aggregate measure to assess the efficiency level in reducing

the energy losses and increasing collection efficiency of a distribution

company. The AT&C losses were lower in Punjab than the all India

Average. The A&C losses were reported to be 17% in Punjab in comparison

to 23% for all India average in the FY 2009-10. It was observed that the

most effective contributing factor towards the loss reduction is the

improvement in the revenue recovery from consumers. Because of increase

in the revenue recovery of dues, the AT&C losses have declined rapidly.

However, there is still huge scope for the state to further reduce the energy

losses.

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Overall profitability of a utility depends upon its technical and

financial performance. A utility is said to be financially viable if it is able to

cover not only its operating expenses but also earn a reasonable rate of

return on its capital base. Appreciating this, an amendment was made in the

Electricity (Supply) Act, 1948 requiring respective SEBs to earn a minimum

rate of return of 3 per cent on its average capital base after meeting all

operating expenses. However, like most of the SEBs in the country, the

financial performance of PSEB did not remain attractive over the period of

time. Under the pressure of the state government, the tariff for some

categories of consumers such as agriculture was very low in comparison to

the cost of supplying power. Therefore the PSEB was not able to recover the

total cost of supplying power in the state.

It was observed that increase in average cost of supply was more than

the average revenue realized from the consumers. The average cost of

supply increased from 107 paise per unit in 1990-91 to 332 paise per unit in

2009-10. During the same time period, the average tariff increased from 55

paise per unit in 1990-91 to 223 paise per unit in 2009-10. Consequently, the

gap increased rapidly. The revenue gap (including the subsidy received from

the state government) increased from 52 Paise per unit in 1990-91 to 109

Paise per unit in 2009-10. It shows that PSEB was unable to recover its cost

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through tariff. It resulted in poor financial performance of the electricity

Board. Hence, PSEB should undertake some effective remedial measures to

increase the average revenue realisation and cut down the avoidable &

wasteful expenses.

Moreover, the analysis of the realised average revenue shows that the

cost recovery from various consumer categories did not have any relation to

the cost of supplying electricity. The average tariff applicable to various

consumer categories differs widely. The tariff payable by the Domestic and

Agricultural consumer categories was very low. These consumer categories

are charged below the average cost incurred for supplying electricity to

them. For example in 1991-92, the Agriculture and Domestic consumer

category were charged only 10 paise and 87 paise per unit respectively while

the average cost of supply was 94 paise per unit. On the other hand some

consumer categories such as Commercial & Industrial etc. were paying

comparatively much higher tariff. The tariff for Commercial users was 161

paise per unit in 1991-92. It implies that the Commercial consumers were

generating 67 paise per unit as surplus revenue to cross-subsidise the

agriculture sector. It shows there was high cross subsidisation in the power

sector. Industrial and Commercial consumers were generating surplus

revenue to cross-subsidise the agriculture sector.

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It was observed that in FY 2009-10 the average revenue realised from

commercial sector was Rs. 4.93/Kwh. It was the highest tariff applicable to

various categories of consumers. The average revenue realized from

commercial consumers was higher than the average cost of supply for the

period from 1991-92 to 2009-10 (Table 4.7). At the same time, Industrial

consumers have also been paying higher tariff than the average cost of

supply. The average revenue received from the domestic and agriculture

consumers was lower than the average cost of supply of the system. Hence,

we can say that cost recovery from commercial and industrial sector was

above 100%. Cost recovery represents the ratio of revenue realized to the

average cost of supply applicable to various consumers. However, in case of

Domestic and Agriculture consumer categories, the cost recovery ratios were

less than 100%. Moreover, from 2000-01 onwards, the cost recovery from

agriculture sector was nil excluding the subsidy received from the state

government.

In Punjab, the farm sector is being provided free power supply for the

purpose of irrigation. Though the provision of free power supply has been

criticized severely in the National Electricity Policy (2005) as well as

Electricity Tariff Policy (2006). However, the State Government has been

providing subsidy to compensate for the losses incurred by utility. It was

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observed that most of the time the subsidy paid by the government was not

adequate to compensate the full cost of supply on account of free power

supply to agriculture sector. This results into huge financial losses to the

distribution utility.

As a result of free power supply, the electricity consumption of farm

sector has increased at a much higher rate. Consequently, the subsidy bill on

the government has increased rapidly. The amount of agriculture subsidy

payable by the state government has increased from Rs.499 crore in 1990-91

to Rs. 1313 crore in 1998-99, and to Rs. 3144 crore in 2009-10. Moreover,

the subsidy as a percentage of total revenue received though tariff has also

increased very rapidly. The percentage share of subsidy has increased from

15% in 2004-05 to 38% in 2009-10. It can be safely concluded that the

ability of the distribution company to generate adequate revenue has

declined significantly in the recent years. The high dependency on the public

exchequer for the purpose of meeting current expenditure is not a good

signal for the sound financial health of electricity distribution company.

Like the other SEBs, PSEB pursued the policy of cross subsidization

to generate the surplus revenue to compensate for the losses on account of

subsidized sale of electricity to Agricultural and Domestic consumer

categories. However, the State Government was unable to pay full amount of

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subsidy on account of free power supply to Agricultural sector and cheap

power made available to some Domestic users. Therefore the Commercial

and industrial users were required to generate surplus revenue to compensate

for the losses of distribution company. The average recovery of cost was

reported over 100% for commercial and industrial consumer categories.

Because of poor financial performance of the distribution company,

the profitability of the company has been adversely affected. The utility was

unable to recover the cost of supply. The commercial losses including

subsidy received from the State Government, have increased from 580 crore

in 1990-91 to 1585 crore in 2009-10 (Table 4.10).

Issues in Tariff Regulation

After its constitution, PSERC has issued twelve tariff orders on the

Annual Revenue Requirements (ARR) filled by the Punjab State Electricity

Board (PSEB) as well as Punjab State Power Corporation Limited (after its

reconstitution in April 2010). The Commission has repeatedly observed that

during most of the years, the data supplied by the utility was not reliable and

up to date. There was a need to strengthen the quality of database available

with the utility. However, certain directions were issued by the Commission

in order to improve the technical and financial performance from time to

time.

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Like most of the Indian states, PSERC has used the rate of return method

to assess the revenue requirement of the utility. Under this method, Annual

revenue requirement is estimated on the basis of expected cost and a

reasonable return on the capital invested in the business. Theoretically, there

should be no significant difference between the cost approved by the

Commission and the actual cost incurred by the utilities. However, this was

not a reality for most of the times in power sector of Punjab. Many times,

there were significant differences observed between the actual performance

of PSEB and the targets fixed by the PSERC. Therefore, the Commission

had to initiate true-up exercises almost every year to make adjustments

between the approved amounts and actual performance made by the

regulated company.

The cost of power purchase is a major cost item. It accounts for more

than 70% of the total cost of power supply. Unsurprisingly, the Commission

has very little discretionary power to control the cost of power purchased

from outside sources. The rates of power purchase from Central Power

Undertakings (CPUs) and the utilities shared with other states were

approved by the Central Electricity Regulatory Commission (CERC).

As stated earlier, one remarkable achievement in the generation

segment was the improvement in the Plant Load Factor. Because of the

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pressure created by PSERC, there was significant improvement in the PLF.

Consequently, three was a positive impact on the cost of power generation.

Per unit cost of power purchase was minimum in Punjab among all the

selected states (Table 5.9).

The employees cost is the second major item in the total cost of

supplying power. The Commission has estimated that the PSEB was

overstaffed and there was an urgent need to improve the productivity of the

manpower. But the Board did not make any plan to make optimal use of

available human resources.

It is observed that the share of terminal benefits was very high in the

total employee cost. This is because of the deferred liability passed on by the

erstwhile PSEB. As per the standard norms, the terminal benefits should be

paid out of the financial contribution made towards provident fund, pension

etc. during in-service period of the employees. However, it did not happen in

case of PSEB. The Board utilized the contributions made by erstwhile

employees for meeting its current expenses. For example the share of

terminal benefit approved was reported to be 40% as per the tariff order

issued for FY 2011-12.

The current pattern of consumption made by different categories was

highly inefficient and costly. If this pattern was allowed to be continued in

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the coming years, the requirement for additional generating capacity will be

very high. It would require huge investment in establishing the generating

capacity, transmission and distribution networks in the State. The

consumption pattern for the FY-1980-81 to FY-2000-10 shows that the

growth rates of consumption for various categories of Consumers were very

high. The overall growth rate was reported to be 7% during this period. The

growth rates were estimated to be 10%, 10%, 6% and 5% for the Domestic,

Commercial, Agriculture and Industrial consumer categories respectively

during the period FY-1980-81 to FY-2009-10 (Table 3.7). It shows that the

high growth rates in the consumption of all the consumers contributed in

increasing the energy demand in future.

The comparative analysis of the selected states shows that all the state

governments (Punjab, Andhra Pradesh, Maharashtra, west Bengal &

Karnataka) had provided major budgetary support to the development of the

power sector. The relative shares of power sector in total plan expenditure

were highest in all the selected states. On an average, about one third of the

total plan expenditure was spent on the development of power sector.

Consequently, the rapid growth rates were reported in the expansion of

generating capacity and distribution networks. Due to sustain efforts made

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on part of government, the per capita consumption of power has increased

manifolds.

Punjab State Electricity Board (PSEB) showed significant

performance in improving Plant Load Factor at the generation level. The

reported PLF in Punjab was higher in Punjab among the selected states in

FY 2009-10. It helped the PSEB in reducing the cost of energy as well as

addressing the energy shortages in the state.

Auxiliary consumption in Punjab was reported less than other states

except Karnataka in the FY 2009-10. The auxiliary consumption of West

Bengal was higher among the selected states as well as national average.

Therefore, the comparative position of Punjab is better among these states.

In the pre reform period, the reported T&D losses of power

distribution utilities including Andhra Pradesh, Karnataka and West Bengal

were very high. However, after the initiation of reforms process, significant

improvements were reported in the reduction of T&D losses. One important

reason for this was the enforcement of regulation and pressure made by

respective regulatory commissions to reduce the energy losses.

AT&C losses were reported higher in Punjab the level achieved by

Andhra Pradesh. However, PSEB has made remarkable performance in the

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reduction of AT&C losses. Consequently, the AT&C losses level in Punjab

was reported as one of the lowest in the country.

All the states had improved the revenue collection efficiency.

Recently, the collection efficiency in Punjab as well as other states was

reported to be approximately 100%. Full recovery of billed amount is an

indicator of improved financial performance of the distribution business.

The position of the Utility in terms of quick ratio was better in pre

reform period because quick ratio was in the rage of 1.85:1 to 1.17:1 in that

period. It satisfied the specified benchmark for the quick ratio is 1:1 but after

the reform process it was less than1:1 and was reported in the range of

0.85:1 to 0.97:1 that was not acceptable for the financial health of the utility.

The position of the utility in term of cash ratio was better in pre

reform period in spite of post reform period because cash ratio was equal to

its benchmark (.05:1) in this period but in the post reform period in FY

2005-06 and 2006-07 it was 0.02:1 which was a worse position for the utility

but after taken remedial measure by the utility it again reached 0.5:1 in

2007-08.

Current assets turn over ratio was in the better position in post reform

period than pre reform period. It was 1.50 in pre reform period and after

reform it was greater than 2.00.

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Gross profit margin ratio showed decreasing trend in the pre reform

period. It was 6% in 1996-97 reached 1%in 1997-98but again increased and

reached 5% in 1998-99, but after the reform process it became negative and

there was a net loss of 23% in 2007-08 then the utility had taken remedial

measure to control it but succeed only 5% and there was a loss of 18%in

2007-08 and 11% in 2008-09but the loss again increased in 2009-10and

reached 16%.

Net profit showed a decreasing trend during the period under

consideration. It was 4% in 1996-97decreaed and reached 2% in 1998-99.

But after the reform process it became negative and there was a loss of 23%

in 2006-07 which was a very dangerous position for the Utility. Then PSEB

took remedial measures to control it and the loss has decreased in 2008-09

and reached 12% but it again increased in 2009-10 and reached 16%.

Interest and finance charges were between 12% to 28% in total sale

and 18% in total expenditure. Net capital was negative in 2006-07that is

why Capital employed was decreased in that year. Return on capital

employed was negative all over the period under consideration expect 2009-

10.

After evaluating the experience of reforms process in the state, it is

concluded that after reforms process, the PSPCL has made some effort to

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improve the technical as well as financial performance. However, the

distribution business of the company was making huge commercial losses.

Most of the power supply to agriculture was un-metered. The subsidy paid

by the government was not adequate to cover the losses. Hence, there is a

urgent need to take some effective steps to improve the technical and

financial performance of the utility. In order to make some improvement in

the performance of the Punjab power sector, the following suggestions are in

order:-

Policy Suggestions

• The utility should improve its information and database system. The un-

metered supply should be stopped at the earliest possible time. All power

supply including agriculture and others should be metered. Only the metered

supply can ensure proper and efficient use of electricity by stopping the

wastage of electricity and making the consumers accountable.

• Attempts may be made to make the system more transparent and

accountable. There is still a lack of transparency and accountability in the

system. The personal responsibility of the employees/ authorities should be

fixed for the performance made along with appropriate incentives/

disincentives for efficiency improvements.

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• High T&D loss level was the main cause for the poor financial

performance of the PSEB. The energy available should be monitored and

audited at the circle/ division levels of the utilities. Responsibilities of the

authorities should be fixed to plug these high levels of technical and

financial losses.

• The utility should monitor the system regularly at the consumer end

regarding connected load, consumption, metering, billing and payments etc.

to plug the energy and revenue losses. It will help the utility in reducing the

commercial losses.

• The PSERC should force the PSPCL to ensure better financial

management of the system. The loans may be approved only after making a

proper Cost Benefit analysis of the projects under consideration. The State

Government may be asked to share the burden of loans that were borrowed

due to bad financial management of the erstwhile Punjab State Electricity

Board (PSEB).

• State Government should issue policy directions only after consulting the

Commission. The autonomous status of the Commission should be

maintained by assisting the Commission in a proper and desired way. The

State Government should be made to pay the full amount of subsidy in cash

on account of free power supply to agriculture sector.